American Capital to de-list European Capital

The publicly traded US firm suffered $698m in third quarter write-downs, $264m of which stemmed from European Capital’s sinking stock price. The firm, which was downgraded and put on a negative watch by S&P, said it was suspending dividend payments.

European Capital’s parent, S&P 500-listed American Capital, will pay roughly $158 million via stock swaps to purchase the 32.3 percent of the London Stock Exchange-listed affiliate that it does not already own. Each European Capital ordinary share will be exchanged for 0.333 American Capital common stock shares.

“Unfortunately over the recent months, the share price of European Capital has traded at a significant discount to its net asset value, like most financial companies in the world, to the point that the benefits that we believed would be created by a separate listing are now negated,” American Capital chairman and chief executive Malon Wilkus said in a statement.

As of 30 June, European Capital's net asset value per share was €7.87, or 19 percent less than its 31 December 2007 NAV of €9.67 per share. At press time, European Capital shares were trading at €1.90.

Wilkus said during a conference call Monday that the firm will suspend dividend payments to preserve liquidity and bolster its tangible net worth to meet covenant requirements on its revolving credit facilities.

American Capital's board will review the firm's cash flow, liquidity and tangible net worth each quarter to determine if dividends will be paid out. He said the firm expects to pay a minimum of $300 million in dividends by 30 September.

The share price of European Capital has traded at a significant discount to its net asset value.

Malon Wilkus

Based on the Friday closing share price of American Capital, European Capital shareholders will receive stock worth $4.59 per ordinary share, which implies a $490 million market capitalisation and $2 billion total enterprise value.

Expected to close in the first quarter of 2009, the deal is subject to shareholder and Guernsey court approval.

American Capital, meanwhile, has reported a third quarter loss of $701 million, or $2.63 per diluted share, which is down from the $2.74 loss per share reported in the third quarter 2007.

The firm said the losses were driven by $698 million in write-downs, $264 million of which was linked to its investment in European Capital and $183 million of which was tied to declining trading multiples of comparable public companies and cash flow decline in portfolio companies.

American Capital’s NAV per share as of 30 September was $24.43, a 26 percent drop from its 31 December 2007 NAV of $32.88 per share.

Standard & Poor's downgraded its rating on the firm to BBB and placed it on “CreditWatch with negative implications”. The action, said analyst Jeffrey Zaun, “reflects increased concern about the ability of [American Capital] to maintain financial performance consistent with the current rating in light of further deterioration in both the economy and private finance markets”.

Slumping stock prices and NAV were also the chief reasons Kohlberg Kravis Roberts gave for deciding to de-list and purchase its Euronext-listed affiliate, KKR Private Equity Investors. The firm plans to complete the transaction in 2009, ahead of a public float on the New York Stock Exchange.

Christopher Witkowsky contributed to this report.